Budget Cuts and IOUs: What’s Squeezing the States?

The Great Recession has shoved state governments over the fiscal edge. But what brought states to that edge in the first place?

On July 1 last week, in state capitals across the United States, a new fiscal year began — amid nearly unprecedented fiscal chaos. In California, officials closed summer schools and made plans to pay bills with IOUs. In Arizona, state parks shut down for a day. In Illinois, drug treatment programs, facing a 72 percent funding cutback, were warning they may have to stop accepting new clients.

Overall, so far this year, 23 states have slashed programs for the elderly and disabled, 24 have axed aid to public schools, and 41 have sliced state worker jobs and benefits. And tens of billions in red ink still remain.

How could state budgets possibly spin so wildly out of kilter?

The current state budget crisis reflects, of course, the current recession. With economic activity down sharply, state tax revenues have fallen sharply, too. The already jobless aren’t paying state income tax. People worried about losing jobs are spending less. That’s lowering state sales tax collections.

But the back story to the current state budget crisis, the worst since the 1930s, goes deeper than the still deepening Great Recession. The recession has indeed shoved states over the fiscal edge. But the recession didn’t bring states to that edge. Inequality did. The states with the biggest budget gaps just happen to be, for the most part, the states with the widest gaps between the rich and everybody else.

Why should that be the case? Why should inequality inevitably end up generating chronic budget shortfalls that eventually devastate the programs that average families value?

To get at the answer, we need to go back to a time — the mid 20th century — when states were launching, not cutting, programs to help average families.

Back then, in the 1950s and 1960s, states from New York to California were energetically investing in the infrastructure of modern middle class life. They were building schools for baby boomers, opening brand-new campuses for public colleges and universities, expanding state park systems, widening old roads, and broadening library access.

The vast majority of Americans, back in the mid 20th century, relished these new and expanded public services. The United States, at mid century, had become a solidly middle class nation, and middle class people — and poor people who aspire to middle class status — need and value public services.

This dominating middle class presence in American life would, unfortunately, prove not particularly enduring. The United States would become, over the 20th century’s last quarter, increasingly unequal as Income and wealth began concentrating up ever higher on the economic ladder.

That would be bad news for public services. Rich people, generally speaking, don’t need — and don’t especially value — these services. The wealthy don’t send their kids to public schools. They don’t take books out of public libraries. They don’t use public transportation. They don’t spend time at public parks. Over time, not surprisingly, these wealthy tend to resent paying taxes to support the public services they don’t use.

Back in the mid 20th century, this resentment didn’t politically matter. In the considerably more equal United States that existed back then, the rich amounted to a marginal slice of the population pie, and the wealth at their disposal didn’t amount to all that much. The rich of the 1950s and 1960s simply didn’t have the resources necessary to dominate and distort the nation’s politics.

That would change. Over recent decades, with more and more income and wealth concentrating at the top, those uninterested in public services have had the resources to do more than grumble about taxes. They’ve been able to bankroll campaign after campaign, in state after state, to roll taxes back.

Growing inequality has helped these campaigns succeed. With the economy’s rewards flowing to the top, and essentially the top alone, Americans in the middle have found their wages and salaries stagnating, even sinking. Tax cuts, for many in the middle, have come to seem the only way to make ends meet.

These tax cuts, once in place, start states on a nasty downward cycle. Tax cuts mean less state revenue. The lower the revenue, the fewer the dollars available for maintaining quality public services. The lower the quality, the greater the number of people who find themselves actively considering private service alternatives.

Soon the modestly affluent, not just the rich, feel better off going life on their own nickel — better off joining a private country club, better off sending their kids to private school, better off living in a privately guarded gated development.

The greater the number of affluent people who forsake public services, the more inevitable still more service cutbacks become — even in “good” economic times, as the Center for Budget and Policy Priorities and the Economic Policy Institute noted last year in Pulling Apart, a detailed look at growing state-level inequality.

“Wealthy families that can afford private schools for their children can lose sight of the need to support public schools,” that study observed. “As a result, support for the taxes necessary to finance government programs declines, even as the nation’s overall ability to pay taxes rises.”

In not one state, the Pulling Apart study found, has inequality meaningfully declined since the 1980s. In 36 states, the study notes, “the income gap between the average middle-income family and the average family in the richest fifth has widened significantly.”

And the gains this top fifth has registered, the study stresses, have been “especially rapid at the very top of the income scale.”

Taxing this “very top,” the Center for Budget and Policy Priorities noted this past April in a follow-up report, could help states close their budget gaps. Even the tiniest of tax increases on the rich could have a sizeable impact.

“Nationwide,” the Center observes, “some $8 billion could be raised if every state with a personal income tax enacted a 1 percent rate increase on households making more than $500,000 a year.”

Some states have moved in that direction. Lawmakers in other states, incredibly enough, are still trying to go the opposite way. In Arizona, legislators last week pressed the governor to accept a “flat tax” that would actually lower the top state income tax rate on the wealthy, from 4.5 to 2.8 percent.

America’s states, in the weeks ahead, will all eventually “solve” their current fiscal shortfalls, mostly with still more cuts in public services. But the underlying state fiscal squeeze will remain. The end of the recession, whenever that comes, won’t end this squeeze. To become less unstable, states are going to have to first become less unequal.

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About Sam Pizzigati

Labor journalist Sam Pizzigati, an Institute for Policy Studies associate fellow, co-edits Inequality.org. Among his books: The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970 (Seven Stories Press, 2012) and The Case for a Maximum Wage (Polity, 2018).